It’s no secret Australians are desperately flocking into the property market before prices rise once again. And the most eager to grasp onto a property are first home buyers.
Yet first home buyers face fierce competition. Things have gotten so out of hand, that the average age for first home buyers has increased from 25 to 31 in the last 30 years. In Sydney, the average age is a staggering 38.
The fact is, many first home buyers are priced out of the market. The biggest hurdle they face is rising house prices and saving up for a deposit — an amount that just keeps on increasing at the same pace as property.
And it is hard to save up if you are paying rent too. As you can see in the chart below, the average size of first home buyer loans has increased considerably in the last five years, especially in NSW.
So many first home buyers have now given up. They have accepted a lifetime of renting and living the lifestyle, rather than having to buy further out.
Yet there is another group. A group of hopefuls and dreamers that are still chasing the great Australian dream. And they will do anything for the slightest chance to make it come true.
There is a — not so — new scheme out there giving them a glimmer of hope: the rent-to-buy market.
The rent-to-buy scheme has been in Australia for a long time. But it has recently resurged, pushed by high property prices, especially in Victoria and NSW.
It all sounds very simple. You rent a property, and the rental payments go towards purchasing the home you are living in.
Hearing about the rent to buy scheme is like a breath of fresh air for all those buyers who are locked out of the market. You can purchase a property and live in it at the same time.
No more struggling to save up for that dreaded deposit.
It all seems too good to be true, right? Well, it is.
The Aussie Property ‘Black Market’
This property ‘black market’ is a very dangerous scheme. Mainly, because it is rigged. And the odds are definitely not in the buyer’s favour.
Take Will, for example, a father of three. He is one of the case studies featured in the report ‘Fringe Dwellings’ published by the Consumer Action Law Centre.
Will signed up for a vendor terms contract. He agrees to a purchase price of $429,000 in three years. Yet the current property value is $360,000.
He agrees to pay a much higher than market rent price of $670 a week for three years, a total of $104,000.
But that is not all. He also has to pay an $8,000 deposit and signed over his First Home Owners Grant of $20,000. So in three years, he is paying a ‘deposit’ of around $132,000, about 30% of current property value.
Once the three years are up, he can purchase the property with a final payment of $404,000. He will need to get the loan from a mainstream bank to do so.
Will is getting ripped off in two ways here. First he is paying much higher than market rent. Then, he is paying an inflated property purchase price of $429,000, which makes it almost impossible to get financing from a bank after three years.
And this is what usually kills the deal. According to the report, the final prices are so inflated that the buyers are unable to get financing, and lose everything.
But let’s say he manages to get financing. At the end of three years, he has paid the seller a total of $536,000. Mind you, this is for a property that was worth $360,000 three years before. Talk about a short term return!
And while Will may have purchased a property, he has paid a deposit of about $132,000, and has a $404,000 loan, on which he has to pay fees and interest. So he will end up paying over double what the property is worth today.
And not being able to get financing is not the only way the deal can backfire.
You see, the ‘buyer’ is not the owner until they pay the purchase price and the seller transfers the property onto their name. So if the seller was to lose the property due to debt, the buyer loses everything.
And this risk can be very real. According to Consumer Action, many of the property sellers are owners in financial distress, in need of quick money.
You may not be the owner on paper, but you are still expected to act like one. You are responsible for all the maintenance and repair costs for the property. Even while you are just the ‘renter’.
These ‘too good to be true’ deals are risking financial ruin.
For The Daily Reckoning